Managing the Risks of a Changing Lower Manhattan, Post 9/11

However long in coming, the Lower Manhattan that is emerging in the distant wake of that terrible day, September 11, 2001, speaks to our capacity for hard-fought renewal. Next to the rising icons of stubborn resolve, Downtown shines with new streetscapes, new hubs of transportation and a burgeoning residential population that is slowly lifting its environs from its erstwhile commitment to Brutalism.

Even with a tower at its heart, the Sidewalk Ballet is re-entering the downtown ethos, albeit under conditions that are more structured and punctilious than organic and spontaneous.

Lower Manhattan is decidedly a market in transition. The “purposeless giantism and technological exhibitionism” that Lewis Mumford called to account for “eviscerating the living tissue of every great city” is increasingly less apropos as a characterization of Downtown’s neighborhoods. The demographic shift facilitated by Liberty Bonds’s repurposing of under-tenanted office properties receives due credit. By all accounts, the last decade’s introduction of new residential space will support a markedly more livable community as office, retail and hotel inventory comes online.

Sam Chandan.

Grand place-making on the scale of the Lower Manhattan project inevitably involves risk. New York, like every great American city, is littered with artifacts of its urban planning errors. To Downtown’s great fortune, some of the worst-conceived plans for its modernization never came to fruition. The Lower Manhattan Expressway is a case in point. Hatched during World War II by Robert Moses, the highway’s 10 lanes would have barreled southward through Soho on their dual paths across the East River.

There is no reason to think that Lower Manhattan’s current reinvention will struggle against the benefit of hindsight. If people vote with their feet, the sheer number of visitors to the 9/11 Memorial tells us that the larger project has been a success. Even in the last few months, as leasing across the city has slowed more than the typical summer slump dictates, excitement is growing around obvious signs of progress toward next year’s milestones.

Against the backdrop of so much progress in rebuilding—and on the anniversary of the attacks themselves—a discussion of property market performance seems tedious and risks a lack of deference. But Downtown is not a reliquary. It faces the same challenges as any living neighborhood—even more so, because it is evolving rapidly.
In building the new lower Manhattan, governments and investors are not alone in bearing the risks. Lenders are betting on Downtown’s long-term strengths as well. It is no surprise when the combination of best-in-class sponsorship and well-located assets obtain financing, such as was the case at 4 World Financial Center.

Across a wider range of property and ownership quality, lenders are signaling less risk in Downtown apartments than in office. For comparable assets and terms, year-to-date average interest rates on lower Manhattan apartment loans are 6 basis points below the greater Manhattan average, essentially undifferentiated from peer neighborhoods. In the office sector, however, lower Manhattan lending rates are 36 basis points higher than for Manhattan overall. Other elements of office loan sizing and pricing also suggest a heightened sensitivity to cash flow stability.

The observation of marginally stronger risk mitigation in Lower Manhattan office lending is no surprise. The next few years’ supply-side expansion anticipates the market’s full potential. Like any ambitious undertaking, it looks forward and resolves that the risks are worth taking.dsc@chandan.com

Sam Chandan, Ph.D., is president and chief economist of Chandan Economics and an adjunct professor at the Wharton School.